Education Department Increases Its Regulation of For-Profit Colleges

The Department of Education on Wednesday tightened its regulation of for-profit colleges and other vocational programs that get billions of dollars in federal aid but leave many students with crushing debt and credentials worth little on the job market.

Under the new rules, programs would lose their eligibility to dispense federal student aid — and as a practical matter, be shut down — if, over the next four years, their graduates fail to meet new benchmarks for loan repayment and ratio of debt to income. But amid intense lobbying by the for-profit college industry and pressure from Republican lawmakers, the department significantly eased the rules from an earlier draft: officials said, for example, that no program would lose eligibility until 2015.

“We believe that very few programs will be forcibly closed by our standards,” Secretary of Education Arne Duncan said. “We want to give people a chance to reform. As a country, we need this sector to succeed. This is not about ‘gotcha.’ ”

These rules, which try to define how such programs prepare students for “gainful employment,” have been the hardest-fought issue in the debate over exploitive and fraudulent practices in the industry. The colleges and their allies spent $12 million lobbying against the rules since the start of 2010, and this spring, the House passed a budget amendment that would have blocked the department’s work on them. The rules were supposed to be issued last summer, but were delayed after the Education Department received a record 90,000 comments on its draft proposal.

The colleges contend the rules are unnecessary and illegal, and would limit educational opportunities for the low-income and minority students who make up most of their enrollment. An industry spokesman said litigation or a new legislative challenge to block the rules were possibilities.

“It still has the same basic framework, so we’re still going to be looking at their statutory authority to create these metrics,” Harris Miller, president of the Association of Private Sector Colleges and Universities, said Wednesday night. “But there’s no doubt that they have taken into account our concerns about issues such as time and giving schools an opportunity to make some changes.”

In the last year, Senate hearings and news reports about abuses in the for-profit education industry have documented how millions of low-income students borrow heavily for training programs that often do not help them land good jobs. Students at for-profit colleges make up 12 percent of those in higher education, but almost half of those who default on student loans.

Although the new rules are a particular threat to for-profit schools, which charge high tuition for vocational programs, they apply broadly to career education, including certificate programs at public and nonprofit colleges, which the Higher Education Act requires to “prepare students for gainful employment in a recognized occupation.”

On Wednesday, department officials estimated that 5 percent of the 13,155 for-profit programs covered by the rules, and 1 percent of the 42,290 public and nonprofit programs, would lose their eligibility for student aid.

A program would lose eligibility for federal aid only if: fewer than 35 percent of its graduates are repaying principal on their student loans three years out, and, for the typical graduate, loan payments exceed 30 percent of discretionary income as well as 12 percent of total earnings.

“We’re asking companies that get up to 90 percent of their profits from taxpayer dollars to be at least 35 percent effective,” Mr. Duncan said.

The new rules take a “three strikes and you’re out” approach. The first time a program failed to meet all three criteria, it would have to report by how much it missed the benchmarks, and outline what it would do to improve. The second time, it would have to warn students that they may not be able to repay their debt and that the program could lose its eligibility. Only a third strike in four years would result in curtailing student aid.

Terry W. Hartle, senior vice president of the American Council on Education, said it was impossible to predict how the industry would react, or know whether the rules were weakened too much.

“No one can really say if it will affect 10 percent of programs, or a 10th of a percent,” he said.

In a conference call with reporters on Wednesday, Gene B. Sperling, director of the National Economic Council, warned that the explosive growth of the for-profit education sector had many of the “same characteristics of what happened with subprime housing and securitization, namely that they can capture all the upside of increasing volume while shifting all of the downside to somewhere else, which is students and taxpayers.”

He said the rules would “only decrease access to very weak programs that leave students with a crushing debt burden.”

A version of this article appears in print on June 2, 2011, on page A18 of the New York edition with the headline: Education Department Increases Its Regulation of For-Profit Colleges. Order Reprints|Today's Paper|Subscribe